hong kong office colliers international | HonG KonG market · two years. a fter posting a 2.9% QoQ...

c o ll i e r s i n t e r n at i o n a l | H o n G Ko n G

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research & forecast report

3Q 2011 | THe knowledge

hong kong officemarket

research & forecast report

market indicators forecast

overall performance

new supply

tenant demand

incentives

rents

capital values

yields

a cyclical Downturn aheadCenTral saw iTs firsT dip in Two yearsDue to the weakening expansionary demand from the banking and finance industries and growing rental resistance towards individual pricey developments, rentals in central saw their first dip in two years. after posting a 2.9% QoQ increase in 2Q 2011, rental growth in sub-district recorded a mild decline of 1.5% QoQ in 3Q 2011. other business districts remained relatively firm due to the support of corporate relocations and upgrading demand from a number of medium-size companies. the average grade a office rents stayed flat during 3Q 2011.

non-finance tenants might turn cautioushowever, with reference to the previous cycles, the whole market is predicted to enter into a consolidation period if central is heading south. Subject to uncertainties in the financial sector, office tenants, particularly those engaged in banking and finance industries, are anticipated to be more cautious. individual companies are seen to relocate to less expensive buildings. if the external economic environment deteriorates further, the stream of relocations in downgrading and consolidation activities amongst a range of different non-finance occupiers is likely to continue.

the depth of consolidationin order to gauge the potential downside of the market, the past cycles can be used as a guide. During the one between 2001 and 2003, overall office rentals fell 40%. the last consolidation happened in 2008/2009. the period of consolidation was shorter, but the degree of rental decline was much steeper at 57%. in the next couple of years, although the average level of new supply will stay significantly below its long-term average, supply might help in slowing the pace of market downturn. our base-case scenario suggests the market will change its course with rentals coming down by 8% in the next 12 months.

downward rental cycle rental change in the down cycle

average new supply (million sq ft per annum)

2001-2003 -40% 1.6

2008-2009 -57% 2.5

2011-2012 * -8% 1.0

*Colliers Forecast

p. 2 | colliers international

hong kong | 3Q 2011 | offiCe

employment trends

Source: Census & Statistics Department, HKSAR Government; Colliers

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Note: FIRE = Financing, Insurance and Real Estate

the latest hSBc hong kong Purchasing managers’ index, job vacancies and hiring expectations statistics suggest further slowing in office leasing demand in the near term.

hong kong gripped by pmi contractionhong kong’s private sector was hit by its first contraction in two years, indicating a sharp deterioration in business conditions. the hSBc hong kong Purchasing managers’ index dropped 3.6 points from 51.4 in July 2011 to 47.8 in august 2011. With a reading under 50 indicating contraction, this signalled the worst deterioration in 26 months. as demand contracted markedly in the wake of a worsening economic environment, the fall in the headline index was led by a decrease in output of private sector firms. output shrank at its fastest rate since may 2009. new orders slipped and employment also decreased – the first decrease since December 2010 – as a drop in new orders and output discouraged hiring.

dip in hiring expectations hiring expectations were lower in 3Q 2011 than the preceding quarter but remain at a healthy level. a quarterly survey conducted by hudson, a global recruitment firm, found hiring expectations across key business sectors experienced a slight dip: 61% of the 600 executives interviewed in the poll planned to increase their headcounts in 3Q 2011, versus 69% in 2Q 2011. this is the first quarter in which expectations have fallen since 2Q 2009 and a levelling off was anticipated after a long period of strong growth. however, many employers tend to take a more conservative approach in 3Q 2011.

across key business sectors, the Legal, consumer and Banking & financial industries outperformed other sectors, such as i.t, media / Pr / advertising. the Legal sector again recorded the highest expectations (90%); while the largest increment in expectations was reported by the consumer sector (68%), mainly underpinned by the buoyant retail business. in the Banking & financial sector, 62% of the respondents would expand their headcount in 3Q 2011, down from 73% in 2Q 2011. Despite the slowdown, there was still a high level of activity in a number of areas, including product sales for corporate banking, iPos and private banking.


colliers international | p. 3

Source: Colliers

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increasing net take-up the strong sell-off in global and local stock markets amid larger downside risks on global growth prospects resulted in a noticeable deterioration in business sentiment and a slowdown in hong kong’s grade a office leasing demand during 3Q 2011. however, the slowdown in leasing activities has yet to be fully reflected in the market. the overall net take up increased by 48% QoQ to 374,000 sq ft in 3Q 2011. activities during the quarter were largely underpinned by the relocation of some tenants away from central as well as expansion demand by tenants into office locations other than central.

sub-market performance – slowing enquiries in central, a slowdown in office leasing enquiries was observed in 3Q 2011. Despite the deterioration in business sentiment, tenants in private equity and the legal sector were comparatively active in office leasing enquiries and typically had office requirements from 3,000 to 5,000 sq ft. this helped to push net take-up levels in central from negative 105,000 sq ft in 2Q 2011 to 125,000 sq ft in 3Q 2011. meanwhile, Wanchai / causeway Bay continued to enjoy tenant relocations as rents in central were close to the historic peak level and the rental discount in central was about 50%. as a result, net take-up in Wanchai / causeway Bay edged up by 28% QoQ to 53,000 sq ft

fire sector’s Job vacancies taper offhong kong’s economic growth continues to be highly dependent on the finance, insurance and real estate (fire) industries. the fire sector, which is a primary office space user group in hong kong, continues to enjoy growth albeit at a slowing rate. the latest figures from the census and Statistics Department indicated that growth momentum in the fire sector’s job vacancies tapered off significantly from 53% YoY in 1Q 2010 to 25% YoY in 2Q 2011. correspondingly, the overall grade a office rents experienced an easing, with growth slowing down from 46% YoY in 1Q 2011 to 27% YoY in 3Q 2011. meanwhile, the rental gap between central and other districts, such as Wanchai / causeway Bay, island east and kowloon east was close to historical highs, therefore the central district would be the most vulnerable to such easing.

in central, a slowdown in office leasing enquiries was observed in 3Q 2011. Despite the deterioration in business sentiment, tenants in private equity and the legal sector were comparatively active in office leasing enquiries and typically had office requirements from 3,000 to 5,000 sq ft. this helped to push net take-up levels in central from negative 105,000 sq ft in 2Q 2011 to 125,000 sq ft in 3Q 2011.



in 3Q 2011. the sub-district of kowloon east was responsible for the bulk of net take-up during the quarter, as a new round of in-house expansions pushed net take-up in kowloon east by 129% QoQ to 165,000 sq ft in 3Q 2011 despite higher rents and lower vacancy.

sources of demand Prominent leasing transactions in central were highlighted by the lease of six floors in cheung kong centre in central by the Securities and futures commission (Sfc) for a monthly rental of hk$15.03 million or an average rent of hk$125 per sq ft per month. the space is currently occupied by Pricewaterhouse coopers. the six floors of Sfc will be located on 21/f, 30 - 33/f and 35/f, in which the lease commencement date for the 21/f is november 2011 and the leases for the remaining five floors will start from September 2012.

tenants relocation: affordability issueSome of the smaller or cost-sensitive tenants were forced to relocate after receiving landlord’s expensive rental proposal, and looked for alternate office accommodations either away from central or into lower-cost options in lower-quality offices in fringe central. Due to tenants’ affordability issues, this pattern of relocation flowed down through the market. the relocating tenants from core central pushed out tenants from fringe central who in turn pushed tenants out to the other districts such as Wanchai / causeway, etc., which created demand in the marketplace. for example, aon corporation will relocate from aon china Building in central to times Square, tower 1 in causeway Bay, as they had pre-committed to lease all of 27/f and 28/f and a portion of the units on 39/f, involving a total floor area of 50,000 sq ft in times Square for a monthly rental of about hk$2.25 million or an average rent of hk$45 per sq ft per month.

tenants in kowloon east saw in-house expansionsthe district of kowloon east experienced rising expansionary demand by the banking sector as well as the non-banking and finance industry sector tenants in 3Q 2011. in relation to the banking and finance sector, Bank of china committed to lease a whole office floor on 25/f millennium city Phase 5, kwun tong, for a unit rental of about hk$30 per sq ft per month, to meet their business expansion needs. this involved a total floor area of 25,000 sq ft. meanwhile, hong kong interbank clearing Limited committed to lease the whole of 5/f and some spaces on 23/f and 25/f, taking up a total floor area of 53,000 sq ft, in mg tower, kwun tong. as regards the non-banking industry, citizen Watch co. Ltd took 20,000 sq ft of space in Landmark east, paying an effective unit rent of hk$29 per sq ft per month. moreover, Donna karan - a US fashion brand leased the whole of 25/f (about 20,000 sq ft) in two Landmark east for an average rental of hk$27 per sq ft per month.

Some of the smaller or cost-sensitive tenants were forced to relocate after receiving landlord’s expensive rental proposal, and looked for alternate office accommodations either away from central or into lower-cost options in lower-quality offices in fringe central.



supply conditionsnew office developments in 2011no new grade a office development was completed in 3Q 2011. Under the final stages of construction, Lht tower in central with a net floor area of over 100,000 sq ft is targeted for completion in 4Q 2011. in addition, the new office development in kowloon east at 414 kwun tong road involves a total floor area of 203,000 sq ft net and is scheduled for completion in 4Q 2011. for 2011 as a whole, an estimated total of 1.2 million sq ft of new grade a office supply in the marketplace is 45% below the long-term average annual supply of 2.2 million sq ft.

supply remains tight in 2012there will be no significant easing on the current tight supply situation, with only four new office developments in our covered markets due for completion in 2012. this includes the redevelopment of the hotel ritz-carlton in central (191,000 sq ft net), hysan Place in causeway Bay (237,000 sq ft net), elite centre (176,300 sq ft net) and 55 king Yip Street (210,900 sq ft net), bringing a total of 815,000 sq ft to the market.

kowloon east will be the key source of supply in 2013for 2013, the sub-district of kowloon east will be the key source of supply, providing a total of 1.5 million sq ft gross of new grade a office space. this involves five developments, considering those buildings with a total gross floor area of 200,000 sq ft and above.

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Source: Rating and Valuation Department (1985-2010); Colliers (2011-2013)



Source: Colliers Note: Demolition: Demolition work is actively undergoingUnder construction: Construction activity, including either foundation or superstructure, are undergoing on siteUnder planning (Existing Building): Building plan for a site, currently occupied by a tenanted building, is approved by the GovernmentUnder planning (Vacant Building): Building plan for a site, currently occupied by an empty building, is approved by the GovernmentUnder planning (Bare Site): Building plan for a bare site is approved by the GovernmentCompleted: Construction is completed and an occupation permit is issued by the Government

grade a office supply (2011 – 2014 and beyond)

building district nfa(sq ft) developer status

2011 new supply

18 kowloon east kowloon Bay 307,847 Sino Land completed50 connaught road central central 122,648 national electronics /

citi Property investors

completed

mg tower kwun tong 478,846 Billion Development completedLht tower central 105,891 the Luk hoi tong co Ltd Under construction

414 kwun tong road kwun tong 203,570 chiefast investment Ltd Under construction

2011 Total 1,218,8022012 new supply

hotel ritz carlton redevelopment central 191,250 Lai Sun/china construction Bank Under constructionhysan Place causeway Bay 237,344 hysan Development Under construction55 king Yip Street & 24 hing Yip Street kwun tong 210,846 Billion Development Under constructionelite centre (20-24 hung to road) kwun tong 176,252 Sun hung kai Properties Under construction

2012 Total 815,6922013 new supply

kowloon commerce centre (Phase ii) kwai chung 442,000 Sun hung kai Properties Under construction52-56 tsun Yip Street kwun tong 305,989 Billion Development Under construction

181 hoi Bun road kwun tong 262,650 Sun hung kai Properties / Wong's Under construction

135-137 hoi Bun road kwun tong 175,650 Sundart Under construction

10 Shing Yip Street kwun tong 209,368 Billion Development Under construction

6 Wang kwong road kowloon Bay 224,645 Billion Development Under construction

10 cheung Yue Street cheung Sha Wan 176,545 Billion Development Under construction

2013 Total 1,796,848

2014 & Beyond new supply

10 harcourt road central 419,468 hutchison Under planning

(existing hutchison house)70 Queen's road central central 156,641 Wheelock Under planning

(existing crawford house)38-52 Queen's road central central 167,292 new World Development Under planning (existing manning

house and Loke Yew Building)10 chater road central 514,342 hongkong Land Under planning

(existing Prince's Building)979 king's road, taikoo Place taikoo Place 1,712,743 Swire Properties Under planning

(existing Warwick house,

Somerset house, cornwall house)9 cheung Yee Street cheung Sha Wan 275,482 nisilk Ltd Under planning (existing kin Yip Plaza)15-17 chong Yip Street kwun tong 226,480 right Union Development Ltd Under planning

(existing nan fung industrial Building)180 Wai Yip Street kwun tong 407,324 Sun hung kai Properties /

Wong's international

Under planning

(existing Wong's industrial centre)98 how ming Street kwun tong 972,243 transport international holdings /

ShkP

Under planning

(existing Bus Depot)2 ng fong Street San Po kong 267,082 Billion Development Under planning

(existing Unimix industrial centre)2014 & Beyond Total 5,119,097



Vacancy

Source: Colliers

grade a office vacancy rates (by sub-markets)

district total stock(million sq ft) 3q 10 4q 10 1q 11 2q 11 3q 2011

central / admiralty 21.4 3.3% 3.0% 3.0% 4.0% 3.5%

Wan chai / causeway Bay 11.1 3.8% 3.5% 3.3% 2.9% 2.4%

island east 10.9 3.2% 5.8% 4.7% 3.9% 4.5%

Sheung Wan 1.6 3.5% 5.3% 3.8% 4.5% 3.9%

tsim Sha tsui 6.4 6.1% 4.8% 6.6% 3.9% 2.6%

kowloon east 8.2 7.3% 5.5% 7.2% 9.8% 12.9%

overall 59.5 4.2% 4.2% 4.3% 4.6% 4.7%

Note: Floor area on net basis

signs of rising vacancy the overall vacancy trended upwards by 14 basis points, from 4.6% in 2Q 2011 to 4.7% in 3Q 2011. the surprisingly stronger-than-expected levels of demand from various sector tenants and the ongoing relocation of cost-sensitive tenants saw vacancy levels in central, Wanchai / causeway Bay and tsim Sha tsui, with the exception of kowloon east and island east, trending downwards in 3Q 2011.

Despite stronger in-house expansion demand from both banking and non-banking sector tenants in kowloon east, the vacancy rate in the sub-market ended the quarter higher than the previous, subject to the completion of mg tower, which contributed to pushing vacancy levels up from 9.8% in 2Q 2011 to 12.9% in 3Q 2011. island east also experienced a lift in vacancy rates, up 56 points from 3.9% in 2Q 2011 to 4.5% in 3Q 2011. expiring leases of relocated tenants and vacant spaces yet to be absorbed by new demand led to a general rise in vacancy in island east.

in kwun tong, the project at 181 hoi Bun road, developed by Sun hung kai Properties / Wong’s, is expected to have a total gross floor area of 301,000 sq ft, with an average floor plate size of 12,000 sq ft. Billion Development’s office project at 52 - 56 tsun Yip Street was still in the process of demolishing the existing buildings. the development is expected to provide a total gross floor area of 375,000 sq ft with an average floor plate size of about 13,000 sq ft. another project by Billion Development at 10 Shing Yip Street was under construction, with a total gross floor area of 300,000 sq ft and a typical floor plate size of 12,000 sq ft. meanwhile, the project at 135 - 137 hoi Bun road by Sundart was under construction, expecting to deliver a total gross floor area of 227,000 sq ft. other than kwun tong, Billion Development’s project at 6 Wang kwong road in kowloon Bay was under construction. the project will provide a total floor area of 330,000 sq ft, with a typical floor plate area of 12,000 sq ft.

potential supply in 2014 and beyond in central, potential new supply in 2014 and beyond will focus on the redevelopment of the existing hutchison house, crawford houses, Prince’s Building as well as manning house and Loke Yew Building, amounting to a total floor area of 1.3 million sq ft net. in island east, the redevelopment of techno centre in taikoo Place, comprising 1.7 million sq ft of office space, will provide tenants more decentralised alternatives on hong kong island. across the harbour, a couple of redevelopment buildings in kowloon east will provide a total of 1.6 million sq ft to the marketplace.

for 2013, the sub-district of kowloon east will be the key source of supply, providing a total of 1.9 million sq ft gross of new grade a office space. this involves five developments, considering those buildings with a total gross floor area of 200,000 sq ft and above.



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Source: Colliers

the lowering of vacancy levels in central, driven by a relative increase in leasing demand from private equity and legal sector tenants, pushed vacancy levels lower by 59 basis point from 4.0% in 2Q 2011 to 3.5% in 3Q 2011. the increase in tenant relocations from central resulted in falling vacancy levels in Wanchai / causeway Bay by 47 basis points from 2.9% in 2Q 2011 to 2.4% in 3Q 2011. the strength of demand prompted leasing options in the sub-market to remain limited, given that the availability of vacant space in higher-quality buildings such as times Square and the Lee gardens was extremely tight. Due to increasing difficulties to secure larger office spaces, the majority of tenants chose to renew their leases unless there would be a significant change in company size, in terms of either expansion or consolidation.

forecast vacancyDue to the anticipated completion of two office developments in the remainder of 2011 and pending higher vacancy due to increasing lease expiry or surrendered spaces in 4Q 2011, the average vacancy level of the whole market is expected to reach its historical average of 5.0%, potentially during the first half of 2012.

the lease expiry of major tenants in central relocating to other districts, will exert pressure on vacancy levels in central. for example, the existing leases of credit Suisse in exchange Square will expire by the end of 2011 and approximately 72,000 sq ft of office space will be released back into the market. the 120,000 sq ft of vacated space in cheung kong centre previously taken up by Deutsche Bank was still available for lease as of 3Q 2011. credit Suisse and Deutsche Bank are two of the anchor tenants in international commerce centre (icc) in West kowloon. meanwhile, the existing lease of ernst and Young in two international finance centre (ifc), involving a total of 69,000 sq ft, will expire in 1Q 2012. the group is relocating to citic tower in admiralty.

the average grade a office rents stalled across the five sub-markets, with the exception of central, which experienced a minor lowering in rents through 3Q 2011.



the overall grade a office rents are set to slow and undergo a downward correction by 8% over the next 12 months.

Source: Colliers

grade a office rentals (by sub-markets)

district 3q 10 4q 10 1q 11 2q 11 3q 11 3q 2011(% qoq)

central / admiralty $89.6 $97.9 $110.2 $113.5 $111.8 -1.5%

Wan chai / causeway Bay $42.8 $47.2 $55.2 $58.1 $59.3 2.2%

island east $29.8 $32.6 $38.0 $39.2 $40.6 3.7%

Sheung Wan $45.8 $48.6 $50.4 $54.7 $54.7 0.0%

tsim Sha tsui $34.7 $36.3 $39.8 $42.7 $44.8 4.8%

kowloon east $22.9 $24.5 $27.0 $28.8 $29.8 3.5%

overall $53.3 $57.9 $65.2 $67.9 $67.9 0.0%

rentals

stagnant rental growth a sharp deterioration in business conditions, the lowered hiring expectations and the slower growth momentum in the fire sector’s job vacancy suggested softening office leasing demand. the average grade a office rents stalled across the five sub-markets, with the exception of central, which experienced a minor lowering in rents through 3Q 2011.

central saw falling rents in central, landlords kept rents broadly stable albeit with a marginal downtrend, especially those buildings with higher and pending vacancy. after posting a 2.9% QoQ increase in 2Q 2011, rental growth in the sub-district recorded a mild decline of 1.5% QoQ in 3Q 2011, due to the relatively weaker demand from the banking and finance sector tenants. the central district would be the most vulnerable to easing, given the rental gap between central and other districts, such as Wanchai / causeway Bay, island east and kowloon east which stayed close to historical highs as of 3Q 2011. top-tier buildings in central will experience higher pressure on easing given its pending vacancy due to increasing surrender stocks, where rents have already got into a headwind since July 2011.

growth in other sub-markets tapers off other than central, all sub-districts experienced rental growth amid a slower growth pace. the rise in rents was due to expansionary demand from various sector tenants, as well as relocations of smaller or cost-sensitive tenants. in Wanchai / causeway Bay, the pick-up in demand, largely from tenant relocations, coupled with falling vacancy prompted landlords to adopt a stronger stance in rental negotiations, thereby lifting overall rental growth in the sub-district by 2.2% QoQ in 3Q 2011. in island east, the aggressive position taken by landlords in leasing negotiations had driven rents to increase by 3.7% QoQ despite vacancy climbing to 4.5%. across the harbour in kowloon, tsim Sha tsui recorded the strongest rental growth during 3Q 2011, which contributed to a 4.8% QoQ increase in average rents, due to a very low vacancy at 2.6%. in kowloon east, expansionary and upgrading demand from both banking and non-banking sector tenants continued to support rent increases by 3.5% QoQ in 3Q 2011.

landlords were less firm in rental negotiations clouded by the fragile economic recovery of the US and the lingering sovereign debt crisis in the eurozone, several multinational corporations put their expansion plans on hold, while a number of landlords became less firm in rental negotiations, particularly those office buildings in central with high and pending vacancy.



rental forecastthe market is heading towards a downturn on the back of falling rents in central since July 2011. grade a office rents had fallen by 15 - 20% per year during the previous two downward cycles. Looking ahead, a relatively higher rental environment, especially in central, will result in a steady stream of relocations as tenants seek more cost-effective office accommodation. a sharp deterioration in business conditions affecting business expansion plans and an increasing number of companies turning cautious in hiring will progressively weaken office leasing demand. coupled with rising vacancy due to increasing surrender stocks and lease expiry, the office market is expected to come under pressure. in view of the current poor market conditions, it will be increasingly difficult to find tenants, especially in the banking industry, to secure large office spaces paying expensive rents, especially in central. the overall grade a office rents are set to slow and undergo a downward correction by 8% over the next 12 months.

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Source: Colliers



Source: EPRCNote: Investment sales transactions with lump sums of HK$30 million or above

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investment Market

Source: Rating and Valuation Department, HKSAR Government; Colliers

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market volumeinvestment demand for property softened in 3Q 2011. the total value of investment sales transactions, with a total consideration in excess of hk$30 million, was 68% lower than in 2Q 2011, totalling hk$3 billion in 3Q 2011. investors remained cautious and adopted a wait-and-see attitude. the total consideration of investment sales transactions continued to stay below its historic average of hk$5.6 billion per quarter. office prices were still holding firm as there were no signs of investors selling their office premises at significantly discounted prices.

investment rationaleDue to the limited availability of en bloc office investment stock, the bulk of sales transactions, where the total consideration was in excess of hk$30 million, remained focus on the traditional strata-titled office properties in decentralised locations in kowloon east.

outperformance in kowloon eastthe continual influx of owner-occupiers buying into the kowloon east sales market pushed capital values slightly higher through 3Q 2011. Sales activity in kowloon east remained focussed on the pre-sale of elite centre developed by Sun hung kai Properties and the office development at 55 king Yip Street, both located in kwun tong, due for completion in 2012. Sales response at the two projects was well received, in which only two floors were left for sale in elite centre, while 60 - 70% of the units at 55 king Yip Street were sold. this helped to boost investment activities in the kowloon east district.

commercial site sold through government tendersthe limited opportunities to purchase en bloc office assets had prompted some developers to remain keen to replenish their land banks. Wheelock Properties purchased two commercial sites through government tenders in 3Q 2011, where the kwun tong commercial site located at the junction of Wai Yip Street, Shun Yip Street and hoi Bun road (nkiL no. 6269) was acquired for hk$3.528 billion (accommodation value of hk$3,856 per sq ft). the developer plans to build two 20-storey grade a office buildings with a total gross floor area of 914,897 sq ft. the acquisition of a commercial site at the junction of hung Luen road and kin Wan Street, hung hom Bay reclamation, (kiL no. 11111) by Wheelock Properties fetched hk$4.028 billion (an aV of hk$6,827 per sq ft). in addition, Smart edge Limited won the tender for a site at the junction of kai cheung road and Wang kwong road in kowloon Bay for hk$3.432 billion(an aV of hk$4,026 per sq ft).

colliers international (hong kong) limited:

Suite 5701 central Plaza18 harbour road Wanchaihong kongtel +852 2828 9888fax +852 2828 9899company Licence no: c-006052

simon loexecutive Director | research & advisory | asiatel +852 2822 0511fax +852 2868 5275email [email protected]

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Source: Colliers

the market is heading towards a downturn in view of falling rents in central since July 2011. rents fell by 15 - 20% per year during the previous two downward cycles. considering a general deterioration in business conditions affecting business expansion plans, increasing numbers of companies have turning cautious in hiring will progressively weaken office leasing demand in hong kong. the office market expects to come under pressure in anticipation of rising vacancy due to increasing surrender stocks and lease expiry. it will be increasingly difficult to find tenants, in the banking industry in particular, to secure large office spaces paying expensive rents, especially in central, subject to a weak business environment. the overall grade a office rents are set to slow and undergo a downward correction by 8% over the next 12 months.

the level of grade a office supply was relatively higher in the previous two downward cycles in 2008 - 2009 and 2001 - 2003, with the average supply brought to about 2.5 million sq ft and 1.6 million sq ft, respectively. Due to the anticipated tighter supply situation of 1.0 million sq ft of supply in 2011 - 2012, the rate of rental decline is expected to be of a smaller magnitude than the previous two downward cycles.

downward rental cycle

grade a office rental rate

average grade a office supply

2001 - 2003 -40% 1.6 million sq ft

2008 - 2009 -57% 2.5 million sq ft

2011 - 2012* -8% 1.0 million sq ft

Source: Colliers, Rating & Valuation Department of HKSAR *Colliers Forecast

Date post:	17-Apr-2020
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hong kong office colliers international | HonG KonG market · two years. a fter posting a 2.9% QoQ...

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